Tesla: Margin Flexibility Shows A Key Advantage

Jul. 28, 2023 4:51 PM ET Tesla, Inc. (TSLA)

Summary

• Many analysts have pointed to the recent margin decline in Tesla, Inc. as a sign of future challenges.
• Tesla’s margin flexibility gives the company a significant advantage in the coming battle against traditional automakers.
• Wall Street has rewarded companies with higher revenue growth rates and modest margins compared to companies with modest revenue growth and high margins.
• Even at 25% YoY revenue growth, Tesla’s annualized revenue should hit $500 billion by 2030, giving the company more than 20% revenue share in annual auto sales.
• Long-term investors should focus more on the revenue growth trajectory to gauge the return potential in Tesla stock.

The article discusses Tesla, Inc.’s recent decline in gross margin and the concerns raised by analysts about the company’s long-term performance. However, the author argues that Tesla’s margin flexibility gives it a significant advantage over traditional automakers in the electric vehicle (EV) manufacturing space.

Tesla has demonstrated a 50% compound annual growth rate (CAGR) in revenue over the past ten years and has forecasted a similar growth rate till 2030. Even if the company achieves half of this growth, at 25% CAGR, Tesla’s revenue base could reach $500 billion by 2030. This substantial revenue base opens up greater monetization options beyond selling cars.

The margin flexibility has been a key reason for Tesla’s massive revenue growth compared to traditional automakers. Tesla’s operating margin has fluctuated from negative 21% to 19% over the past ten years, while most major automakers operate within a narrow range of 3% to 8% margins.

Wall Street tends to reward companies with higher revenue growth rates, even at the cost of some margin decline. Tesla’s valuation is higher due to its massive YoY revenue growth, which would be impossible in a mature industry.

Tesla’s lack of dividends and margin flexibility will be advantageous in the upcoming battle against traditional automakers as new EV models are launched by major players. The company’s revenue growth trajectory and new monetization options should improve its long-term returns potential.

Despite the recent margin dip, Tesla’s revenue growth and market share within the auto industry make it a compelling investment option for long-term investors.

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